Reliance Industries in focus as benchmark refining margin inches up

A benchmark of profitability for crude refiners has increased steadily in the past few weeks, bringing companies like Reliance Industries (RIL) into the spotlight.

The Singapore-Dubai Hydrocracking Refining Margin has spiked 21.33 per cent in the past month, on the back of rising demand for refined products globally. It now hovers around $34.47 a barrel.

On Thursday, Brent crude touched $120.7 a barrel as prices slipped over 2 per cent overnight after the US Federal Reserve raised its key interest rate by 0.75 per cent. From a refining perspective, a rise in the benchmark margin has been led by sanctions on Russia, refinery shutdowns, and cessation of exports of refined products by China. This gap is now being met by Indian refiners like RIL.

“RIL remains among the best positioned refiners globally, given its ability to buy and process arbitrage barrels, a diesel-heavy slate, and an export focus,” brokerage JP Morgan India said in a report dated June 16.

The brokerage has upgraded its rating on shares of RIL to ‘overweight’ from ‘neutral’ and has set a price target of Rs 3,170 apiece. This is an upside of more than 22 per cent over the next 12 months.

On Thursday, the RIL stock closed 1.43 per cent down on the BSE over the previous day’s close in a weak market. It stood at Rs 2,559.20 per share at the end of trade on the stock exchange. JP Morgan isn’t the only brokerage house, however, to update its outlook on RIL.

Last week, Citi Research and Morgan Stanley were upbeat on RIL, too, saying it was the biggest beneficiary of rising crude oil imports from Russia.

Among refiners, RIL’s high product export ratio and relatively minor domestic retail operations, with added benefits from sourcing discounted crude, would aid its gross refining margins (GRMs), said Citi in its report dated June 5.

Morgan Stanley said RIL’s margins would be 50 per cent above its last peak season in mid-2008.

“Globally, we expect a shortage of one refinery annually for the next few years. If we were to include arbitrage crude advantages, which RIL highlighted earlier, margins would be even higher,” Morgan Stanley Research said in its report dated June 6.

Crude oil imports from Russia, according to Citi, have risen to over 15 per cent of India’s total imports in the last two months (April and May), compared to historical levels of 1-2 per cent. Based on back-of-the envelope calculations, Citi has assumed that a $15-per-barrel discount on roughly 20 per cent of the crude mix could boost RIL’s GRMs by almost $3 per barrel.

“Every $1-per-barrel spike in Reliance’s GRM increases its consolidated 2022-23 (FY23) earnings per share (EPS) by around 4 per cent,” said the brokerage.

For India’s three oil-marketing companies — Bharat Petroleum, Hindustan Petroleum, and Indian Oil Corporation — every $1-per-barrel increase in GRM would raise their FY23 EPS by around 16 per cent, 14 per cent and 16 per cent each, said Citi.

But every Rs 1-per-litre decline in marketing margins would adversely impact their respective earnings by 35 per cent, 40 per cent, and 26 per cent. To completely offset a Rs 1-per-litre decline in marketing margins, these companies would need a boost in GRMs by $1.6-2.8-per-barrel, added Citi.